Bloomberg

Bloomberg | Quint is a multiplatform, Indian business and financial news company. We combine Bloomberg’s global leadership in business and financial news and data, with Quintillion Media’s deep expertise in the Indian market and digital news delivery, to provide high quality business news, insights and trends for India’s sophisticated audiences.

While increasing reliance on an industry that’s at the center of global trade tensions, the investment reinforces the country and the wider region as a global auto-making hub. For Prime Minister Viktor Orban, it’s a vindication of his dedication to manufacturers even as he upset banks and foreign retailers in creating his “illiberal” state.

BMW follows Daimler AG, Volkswagen AG, Suzuki Motor Corp. and France’s PSA Group into the eastern European nation of 10 million people, becoming the fifth major company to start production there. It said Tuesday that the plant near the city of Debrecen in Hungary’s poorer east will have an annual output of 150,000 units. Construction will start next year.

“It’s a favorable development that will help smooth Hungary’s growth path,” ING Groep NV analyst Peter Virovacz said by phone. The investment could help offset a decline in development financing from the European Union, he said.

The forint rose to the strongest level in almost seven weeks on Tuesday, up 0.4 percent against the euro on a day when most other currencies in eastern Europe weakened.

Orban, elected for a fourth term in April, wants to keep the economy expanding at 4 percent or more a year through 2022, exceeding forecasts by the central bank and analysts. Carmakers’ generated 8.08 trillion forint ($29.5 billion) last year, about 21 percent of gross domestic product. Trade with Germany, Hungary’s largest export market, was $58 billion last year, more than the next five largest partners combined.

Low taxes, flexible labor rules and quality education have helped attract investors such as BMW, according to Foreign Affairs and Trade Minister Peter Szijjarto. “Economic policy based on these strengths has proven a success -- investments are growing year after year," he told the state-run MTI news service.

There are risks: manufacturers see labor shortages as a major constraint, with unemployment at a record-low 3.6 percent, among the lowest levels in the EU. But the relatively higher jobless rate in the country’s east could help BMW recruit the 1,000 people it needs for the plant.

While supporting economic activity, the investment increases Hungary’s reliance on the automotive industry, which could backfire if global appetite for cars drops, according to ING’s Virovacz and Orsolya Nyeste, an economist at Erste Group Bank AG.

Daimler is currently doubling the capacity of its Mercedes plant in Kecskemet, central Hungary, with a $1.2 billion expansion of its own.

“If car output doesn’t meet demand abroad, that could have an adverse effect on the economy," Nyeste said by phone. Without measures to improve education and healthcare, Hungary’s growth rate will eventually slow back down to toward 2.5 percent, she said.